Mortgage Terms & Definitions Part II

Mortgage Terms & Definitions Part II

As mentioned in last weeks blog, understanding certain mortgage terms can be very important and beneficial when entering in the process of getting a home mortgage. So this week I will expand further into essential requisites that everyone needs to know from day one.

Equity: The amount the homeowner would receive in cash if they sold their home after all liens have been satisfied. Therefore, it’s the value of the home minus unsatisfied liens. Example: Say you have a $100,000 home with a $75,000 first mortgage, a $10,000 second mortgage, and a $1,000 tax lien; you would have $14,000 in equity.

Equity Position: The percentage of equity in a home.

Loan to Value (LTV): The percentage of the loan amount divided by the lesser of the appraised value or sales price. Example: Let’s say that you have a loan amount of $200,000 and a purchase price of $250,000. Therefore, you would have a 20% equity position in the home; or an 80% loan to value ratio. Now let’s say that the appraised value on the home came in at $235,000. Due to the LTV ratio being divided by the lesser of the two, now you only have a 15% equity position or an 85% LTV ratio. If the appraised value came in at $260,000, you still only have 20% equity and an 80% LTV.

Debt to Income Ratio (DTI): There are two types.

Housing Ratio (also known at front end): This is simply the total housing payment including principle, interest, taxes, and insurance (PITI), and dividing by total gross income per month. Note, insurance is a broad term that includes applicable hazard, flood, mortgage, and HOA dues.

Total Ratio (also known as back end): This is PITI plus all other obligations divided by total gross income per month. Note, “other obligations” include non-obligations that don’t show up on ones credit report; such as car insurance, health insurance, utilities, phone bills, cable TV, etc.

Not sure who to call or where to start? Contact me today for a 100% free no-obligation loan inquiry analysis.